Question

How does technological change influence the planning for capital spending decisions?

Answer 1

Technological change will influence the planning for the capital spending decision because-

A. Capital spending decisions are generally made for the longer period of time and cash flows are associated with them for the longer period of time so changes in technology will be reflecting through change in the estimation of the cash flows.

B.it can result into lack of generation of cash flows due to outdated technology so this will have to be factored.

C. This can even lead to change in the business cycles and life cycle of the product so this will have to be incorporated into capital spending decisions in order to assign better discount rate for this cash flows.

D. It will be helpful in proactive management of the capital budgeting process.

E. Changes in technology will be the significant risk to the the profitability of the project and risk weighting should be done appropriately in order to assign better rate of discount.

So, it can be said that changes in technology should be monitored significantly in order to make capital budgeting decisions so that organisational can proactively manage such technological changes in order to to maximize it's rate of return.